For Salesforce, laying off employees won’t solve the big problem that haunts its stock on Wall Street — it’s the failure of its leadership to create value for its capital holders.
In a letter to employees released on Wednesday, Salesforce Co-CEO Marc Benioff has a simple answer to the company’s woes: the hiring of too many employees.
“I’ve been thinking a lot about how we came to this moment,” Benioff said in a quote from the letter posted on Yahoo Finance. “As our revenue accelerated through the pandemic, we hired too many people leading into this economic downturn we’re now facing, and I take responsibility for that.”
Wall Street cheered the company’s move, which means lower costs and higher margins, something equity analysts pay close attention to for listed companies.
But Wall Street’s enthusiasm for Salesforce’s shares could be short-lived, as the company’s big problem isn’t the employee count but its growth strategy.
For years, Salesforce has been growing by leaps and bounds by acquiring other companies, appeasing the momentum crowd on Wall Street, and fixating on growth.
The trouble is that this growth strategy failed to create value for the company’s capital holders, as Salesforce paid too much for too little return.
Over the last decade, the company’s economic profit, or economic value added (EVA)—a measure of how effectively management allocates capital, has remained negative, according to Gurufocus.com. EVA is the difference between the return on invested capital (ROIC) and the weighted average cost of capital (WACC). A negative economic profit means the company destroys value as it grows.
A closer examination of the two components of Salesforce’s EVA reveals that it pays a great deal to raise capital and earns little or no return. As of Wednesday, Salesforce had an ROIC of 0.37% and a WACC of 8.06%. That gives an EVA of -7.59%.
For instance, in 2020, Salesforce paid $27.7 billion to acquire Slack Technologies Inc. to expand its customer relationship management presence into the fast-growing market for collaboration software.
Salesforce needs to manage other people’s money effectively.
Still, Mina Tadrus, CEO of Tadrus Capital, thinks Salesforce’s move to cut costs could work, but it will take time.
“Ultimately, these measures will decrease costs while still giving customers what they need,” Tadrus told International Business Times. “If successful, this could make Salesforce one of the most profitable SaaS companies ever – something Wall Street’s been eager for since Benioff took charge more than a decade ago. But, of course, it may be another three years before we see concrete results from this strategy – but considering Salesforce’s track record under Benioff’s leadership so far.”